Showing papers on "Profitability index published in 2016"

Environmental and Social Disclosures: Link with Corporate Financial Performance

Abstract: Environmental and social disclosures entail costs, yet increasingly, large listed firms are making higher and better quality disclosures. In this paper we examine the link between a firm's environmental and social disclosures and its profitability and market value. We find that past profitability drives current social disclosures. However, consistent with the existing evidence, we do not find any relation between environmental disclosures and profitability. Further, while prior literature has largely focussed on environmental disclosure, we find that it is the social disclosures that matter to investors. We find that firms that make higher social disclosures have higher market values. Further analysis reveals that this link is driven by higher expected growth rates in the cash flows of such companies. Overall our findings are consistent with the resource based view of the firm and the voluntary disclosure theory, suggesting that firms with greater economic resources make more extensive disclosures which yield net positive economic benefits.

A Taxonomy of Anomalies and Their Trading Costs

Abstract: We study the after-trading-cost performance of anomalies and the effectiveness of transaction cost mitigation techniques Introducing a buy/hold spread, with more stringent requirements for establishing positions than for maintaining them, is the most effective cost mitigation technique Most anomalies with less than 50% turnover per month generate significant net spreads when designed to mitigate transaction costs; few with higher turnover do The extent to which new capital reduces strategy profitability is inversely related to turnover, and strategies based on size, value, and profitability have the greatest capacity to support new capital Transaction costs always reduce strategy profitability, increasing data-snooping concerns

The Validity of ROI as a Measure of Business Performance

Abstract: Business performance at the corporate level is widely assessed by the return, through changes in the price of the stock and dividends, to shareholders. However, corporate level performance analysis, whether for strategic or public policy purposes, is inappropriate in many instances because of the heterogeneity of the corporation's operations. The strategic business units (SBUs) comprising a corporation are often very diverse. Profitability analysis grouping these entities together yields few of the insights needed for strategic or public policy decision making. Because of this heterogeneity, profitability analysis is often advocated and undertaken at the SBU level. The absence of an equity market at the SBU level means that a measuring instrument other than that based on stock price must be used to assess profitability. Due to the lack of alternatives, the performance of an SBU is almost always based on accounting data. In particular, the accounting measure, return on investment (ROI), is widely regarded as the most useful measure and ultimate "bottom line" test of business performance (James Reese and William Cool, 1978). It is used both as an objective of management and as a dependent/ criterion variable to evaluate the effect of various factors on performance. Despite its widespread use, ROI has been extensively criticized as being a totally inadequate indicator of economic rate of return (G. C. Harcourt, 1965; Ezra Solomon, 1971; Franklin Fisher and John McGowan, 1983). ROI, most typically defined as Net Income,/ Total Assets,-1, does not properly relate the stream of profits to the investment that produced it. The earnings numerator is a consequence of investment decisions made in the past, but the assets denominator can be expected to have had influence on not only past and current earnings but also to have influence on future earnings. Because of this failure to produce an accurate mapping, ROI has been criticized as being so seriously flawed that it bears little, if any, resemblance to the crucial concept of internal or economic rate of return. The shortcomings of ROI are said to be so severe that its cross-sectional variations can be completely explained by the inappropriateness of the measure. Due to a lack of proven validity, empirical investigations using ROI have been labeled by Fisher and McGowan as "totally misleading enterprises" and by George Benston (1985) as "of doubtful value." Those making use of accounting ROI argue that the noise created by the accounting distortions need not be expected to drown out the underlying signal of economic return contained in ROI and, therefore, ROI is still appropriate for use in analysis, (F. M. Scherer, 1979, and William Long and David Ravenscraft, 1984). This paper examines the validity of ROI as a measure of economic rate of return by ascertaining the existence and extent of the association of corporate level accounting ROI with stock return, a widely accepted indicator of business performance. The null hypothesis for the analysis is that ROI has no validity as a measure of business performance and, as such, will not exhibit an association with stock return. While the tests provide direct evidence on the validity of corporate level ROI, the same underlying theorized inadequacies of accounting ROI are also present at the SBU level.1 Conclu-

How information technology strategy and investments influence firm performance: conjecture and empirical evidence

Abstract: In this paper, we develop conjectures for understanding how information technology (IT) strategy and IT investments jointly influence profitability and the market value of the firm. We view IT strategy as an expression of the dominant strategic objective that the firm chooses to emphasize, which can be revenue expansion, cost reduction, or a dual emphasis in which both goals are pursued. Using data from more than 300 firms in the United States, we find that at the mean value of IT investments, firms with a dual IT strategic emphasis have a higher market value as measured by Tobin's Q than firms with a revenue or a cost emphasis, but they have similar levels of profitability. Of greater importance, IT strategic emphasis plays a significant role in moderating the relationship between IT investments and firm performance. Dual-emphasis firms have a stronger IT-Tobin's Q relationship than revenue-emphasis firms. Dual-emphasis firms also have a stronger IT- profitability relationship than either revenue- or cost-emphasis firms. Overall, these findings imply that, at low levels of IT investment, the firm may need to choose between revenue expansion and cost reduction, but at higher levels of IT investment, dual-emphasis in IT strategy or IT strategic ambidexterity increasingly pays off.

The determinants of bank profitability: empirical evidence from European banking sector

Abstract: Purpose The purpose of this paper is to investigate the relationship between bank-specific characteristics and profitability in European banking sector to find the role of internal factors in achieving high profitability. Design/methodology/approach A regression analysis is built on an unbalanced panel data set comprising 175 observations of 35 top European banks over the period 2009-2013. To this end, the empirical data are collected from Bankscope and a comprehensive set of internal characteristics is examined. Findings All the determinant variables included in the model have statistically significant impacts on European banks’ profitability. However, the effects are not uniform across profitability measures. Regression findings reveal that size and capital ratio are significant company-level determinants of bank profitability in Europe, while higher loan loss provisions result in lower profitability levels. Findings also suggest that banks with higher deposits and loans ratio tend to be more profitable but the effects on profitability are statistically insignificant in some cases. Practical implications This study has considerable policy implications, as the performance of the European banking sector depends on its efficiency, profitability and competitiveness. In view of these findings, some suggestions may be functional for bank regulatory authorities to intensify and sustain robustness and stability of the banking sector. Originality/value The results provide interesting insights into the characteristics and practices of profitable banks in Europe. Few econometric studies have empirically explored the determinants of bank profitability in Europe so far, even though similar studies have been conducted in several developed countries. Therefore, this paper tries to close an important gap in the existing literature improving the understanding of bank profitability in Europe.

Investment-less Growth: An Empirical Investigation

Abstract: We analyze private fixed investment in the U.S. over the past 30 years. We show that investment is weak relative to measures of profitability and valuation – particularly Tobin’s Q, and that this weakness starts in the early 2000’s. There are two broad categories of explanations: theories that predict low investment because of low Q, and theories that predict low investment despite high Q. We argue that the data does not support the first category, and we focus on the second one. We use industry-level and firm-level data to test whether under-investment relative to Q is driven by (i) financial frictions, (ii) measurement error (due to the rise of intangibles, globalization, etc), (iii) decreased competition (due to technology, regulation or common ownership), or (iv) tightened governance and/or increased short-termism. We do not find support for theories based on risk premia, financial constraints, or safe asset scarcity, and only weak support for regulatory constraints. Globalization and intangibles explain some of the trends at the industry level, but their explanatory power is quantitatively limited. On the other hand, we find fairly strong support for the competition and short-termism/governance hypotheses. Industries with more concentration and more common ownership invest less, even after controlling for current market conditions. Within each industry-year, the investment gap is driven by firms that are owned by quasi-indexers and located in industries with more concentration and more common ownership. These firms spend a disproportionate amount of free cash flows buying back their shares.

Efficient Feed-In-Tariff Policies for Renewable Energy Technologies

Abstract: Feed-in-tariff (FIT) policies aim at driving down the cost of renewable energy by fostering learning and accelerating the diffusion of green technologies. Under FIT mechanisms, governments purchase green energy at tariffs that are set above market price. The success or failure of FIT policies, in turn, critically depend on how these tariffs are determined and adjusted over time. This paper provides insights into designing cost-efficient and socially optimal FIT programs. Our modeling framework captures key market dynamics as well as investors’ strategic behavior. In this framework, we establish that the current practice of maintaining constant profitability is theoretically rarely optimal. By contrast, we characterize a no-delay region in the problem’s parameters, such that profitability should strictly decrease over time if the diffusion and learning rates belong to this region. In this case, investors never strategically postpone their investment to a later period. When the diffusion and learning rates ...

The Effect of Corporate Governance on Firm Market Value and Profitability: Time-Series Evidence from Turkey

Abstract: We study the corporate governance practices of Turkish public firms from 2006 to 2012, relying on hand-collected data covering the vast majority of listed firms. We build a Turkey Corporate Governance Index, TCGI, composed of subindices for board structure, board procedure, disclosure, ownership, and shareholder rights. TCGI predicts higher market value (with firm fixed effects) and higher firm-level profitability with firm random effects. The principal subindex which predicts higher market value and profitability, and drives the results for TCGI as a whole, is disclosure subindex. We also study the determinants of firms' governance and find that most firm-specific factors have little effect on firms’ governance choices.In a related project, The Effect of Business Group Governance on Group Market Value and Profitability: Time-Series Evidence from Turkey, http://ssrn.com/abstract=2277768, we study the effect of business group-level corporate governance on group level market value and profitability.

Customer-Base Concentration, Profitability, and the Relationship Life Cycle

Abstract: Using a recently expanded dataset on supplier-customer links, we introduce a dynamic relationship life-cycle hypothesis. We hypothesize that the relation between customer-base concentration and profitability is significantly negative in the early years of the relationship, but becomes positive as the relationship matures. The key driver of this dynamic is the customer-specific investments that the relationship entails. These investments result in larger fixed costs, greater operating leverage, and a higher probability of losses early in the relationship, but can significantly benefit the firm as the relationship matures. Although many of these money-losing firms in early-stage relationships were not studied in Patatoukas (2012), we find a market reaction to increases in customer concentration similar to that in his paper. This result provides powerful confirmatory evidence of the value of customer concentration. We document one of the intangible benefits of customer concentration, technology sha...

Efficiency evaluation of banks in China: A dynamic two-stage slacks-based measure approach

Abstract: Operational processes of banks in China can be divided into productivity and profitability stages. Within this, non-performing loans can be treated as a carry-over variable, an undesirable output of the profitability stage in the previous period but an input to the profitability stage in the current period. Using this framework, this paper proposes a dynamic two-stage slacks-based measure model to evaluate the efficiencies of Chinese banks. Based on the proposed model, the measures of stage, period and period stage efficiencies are defined. The proposed approach is applied to evaluate the operational efficiency of banks in China during 2008–2012. Key findings are that banks in China show both technical and scale inefficiency during 2008–2012, which results from the inefficiencies of both the productivity stage and profitability stage; city-owned commercial banks are more overall technically efficient than state-owned commercial banks and joint-stock commercial banks although state-owned commercial banks show best practice for pure technical efficiency, and city-owned commercial banks perform better than joint-stock commercial banks for pure technical efficiency.

Oil Prices and Bank Profitability: Evidence from Major Oil-Exporting Countries in the Middle East and North Africa

Abstract: This chapter analyzes the relationship between oil price shocks and bank profitability. Using data on 145 banks in 11 oil-exporting Middle East and North Africa (MENA) countries for 1994–2008, we test hypotheses of direct and indirect effects of oil price shocks on bank profitability. Our results indicate that oil price shocks have indirect effect on bank profitability, channeled through country-specific macroeconomic and institutional variables, while the direct effect is insignificant. Among organizational forms, investment banks appear to be the most affected ones compared to Islamic and commercial banks. Our findings highlight systemic implications of oil price shocks on bank performance and underscore their importance for macro prudential regulation purposes in MENA countries.

Trapped Cash and the Profitability of Foreign Acquisitions

Abstract: Current US reporting and tax laws create an incentive for some US firms to avoid the repatriation of foreign earnings, as the US government charges additional corporate taxes on these transfers Prior research suggests that the combined effect of these incentives leads some US multinational corporations to hold a significant amount of cash overseas In this study, we investigate the effect of cash trapped overseas on US multinational corporations' foreign acquisitions Consistent with expectations, we observe firms with high levels of trapped cash make less profitable acquisitions of foreign target firms using cash consideration (lower announcement window returns, lower buy and hold returns, decreased ROA) The American Jobs Creation Act of 2004 (AJCA) reduced this effect by allowing firms to repatriate foreign earnings held as cash abroad at a much lower tax cost Our study has implications for current proposals to change the tax laws related to foreign earnings

Is Islamic bank profitability driven by same forces as conventional banks

Abstract: Purpose The purpose of this paper is to ascertain whether Islamic bank profitability is driven by same forces as those driving conventional banking in the Middle East and North Africa (MENA) region. Distinguished by its principles in conformity with sharia, Islamic banking is different from conventional banking, which is likely to affect profitability. Design/methodology/approach The paper builds on a dynamic panel data model to identify the banks’ specific determinants and the macroeconomic factors influencing the profitability of a large sample of 51 Islamic banks operating in the MENA region from 1994 to 2012. The system-generalized method of moment estimators are applied. Findings The findings reveal that profitability is positively affected by banks’ cost-effectiveness, asset quality and level of capitalization. The results also indicate that non-financing activities allow Islamic banks to earn higher profits. Islamic banks perform better in environments where the gross domestic product and investment are high. There is evidence of several elements of similarities between determinants of the profitability for Islamic and conventional banks. The inflation rate, however, is negatively associated with Islamic bank profitability. Practical Implications The authors conclude that profitability determinants did not differ significantly between Islamic and conventional banks. Many factors are deemed the same in explaining the profitability of conventional as well as Islamic banks. The findings reported in the current paper might be of interest for policy makers. It is recommended to better implement non-financing activities to improve Islamic bank profitability. Originality/value Unlike the previous empirical research, this empirical investigation assesses the issue whether Islamic banks profitability is influenced by same factors as conventional model. It enriches the literature in this regard by considering the specificities of Islamic banking to identify the determinants of profitability. Moreover, this study considers a large sample (51 Islamic banks) through a different selection of countries/banks than previous studies. In addition, the period of study considers the subprime crisis insofar it ranges from 1994 to 2012. Hence, this broader study allows the authors to draw more consistent conclusions.

To Groupon or Not to Groupon: The Profitability of Deep Discounts

Abstract: We examine the profitability and implications of online discount vouchers, a relatively new marketing tool that offers consumers large discounts when they prepay for participating firms’ goods and services. Within a model of repeat experience good purchase, we examine two mechanisms whereby a discount voucher service can benefit affiliated firms: price discrimination and advertising. For vouchers to provide successful price discrimination, the valuations of consumers with access to vouchers must generally be lower than those of consumers who do not have access to vouchers. Offering vouchers tends to be more profitable for firms that are patient or relatively unknown, and for firms with low marginal costs. Extensions to our model accommodate the possibilities of firm price reoptimization and multiple voucher purchases. We find potential benefits of online discount vouchers to certain firms in certain circumstances, but vouchers are likely to increase firm profits under relatively narrow conditions.

Mapping frontier economies. (cover story)

Abstract: Global players in search of double-digit growth are running out of opportunities. Emerging-market giants such as Brazil, Russia, and China are experiencing an economic slowdown. They are increasingly expensive as a base for operations, and it’s harder to export to and import from these countries than it used to be. As a result, multinationals are paying more attention to low-income, high-risk countries both as new markets for selling goods and services and as platforms from which to export them elsewhere. Even in industries where competition is skewed by government manipulation, foreign players that target the right sectors with the right strategies can prosper. The first step in identifying opportunities in a frontier economy is to assess the competitive environment of its industries along two dimensions: (1) the degree to which profitability is determined by competition between firms and not by government policies and actions and (2) whether the industry is focused primarily on domestic sales or on exports. Industries will fall into one of four categories. Each category is associated with a distinct strategy, ranging from the conventional (leverage existing capabilities, adapt to local tastes) to the unfamiliar (make yourself indispensable to powerful local players). In this article, the authors offer companies a framework to help figure out whether and where to play and how to win in the spaces in which they choose to compete. INSETS: What Is a Frontier Economy?;Competition May Be Tougher Than You Think. [ABSTRACT FROM AUTHOR]

Influence of Profitability to the Firm Value of Diversified Companies in the Philippines

Abstract: The main objective of every company is to maximize the assets or firm value. Maximizing firm value is essential for a company because it means increasing the wealth of shareholders as well. This study aims to determine if there is significant influence between the company’s profile such as industry, company age and its profitability with the firm value using Tobin’s Q model. The proponents selected 86 diversified companies in the Philippines by gathering and analyzing annual financial reports on 2014 in the Philippine Stock Exchange (PSE) to obtain the objective of the study and also employed predictive correlational design. Frequency, Mean and Multiple Regression were used to determine the significant influence between the independent and dependent variables. The multiple regression reveals that of the three factors assumed to influence value of the firm using the Tobin’s Q, only profitability shows significant positive impact on the firm’s value.